* Prospect of reduced Fed stimulus lifts euro zone yields
* Bund futures hit lowest since October 2012
* Bunds may recover as periphery yields rise-analyst
By Marius Zaharia
LONDON, June 24 German Bund futures hit
eight-month lows and lower-rated debt yields rose on Monday as
prospects of reduced monetary stimulus in the United States took
a further toll on battered bond markets.
The Federal Reserve signalled last week that it would slow
the pace of bond purchases later this year, triggering a global
sell-off as investors interpreted the announcement as the first
step towards the end of monetary easing.
The Bank for International Settlements echoed this theme on
Sunday, saying central banks should not allow fears of
disrupting markets delay the timely withdrawal of cheap money.
Adding to investor anxiety, official news reports in China
over the weekend suggested Beijing will not change its
tightening policy as it looks to crack down on shadow banking,
blamed for a cash crunch on the mainland.
"The BIS suggested central banks should unwind monetary
policy stimulus ... and it looks unlikely that China would be
easing its policy any time soon," said Nick Stamenkovic, bond
strategist at RIA Capital Markets in Edinburgh.
"This created some nervousness ... But the main driver is
the U.S. (central bank) ... which triggered a correlated
sell-off in the U.S. and euro zone debt markets."
Bund futures were last down 49 ticks on the day at
140.90, having earlier fallen as far as 140.58 - their lowest
since October 2012.
Losses could extend towards the September 2012 low of 138.41
initially, Commerzbank technical strategists said in a weekly
note. In the longer term, Bunds could fall towards the 132.82 -
132.99 area defined by the 50 percent retracement of the
2011-2013 rally and the lows hit at the end of 2011, they said.
However, Norbert Wuthe, rate strategist at Bayerische
Landesbank in Munich, did not expect the sell-off in Bunds to
last as the rise in peripheral yields, largely triggered by the
Fed's timetable for withdrawing stimulus, should renew
safe-haven bids for German debt.
Economic and political weaknesses in the lower-rated states
on the euro zone's periphery should also add to Bunds' appeal.
Italy said it plans to delay raising value added tax by at
least three months as the proposed hike has become a source of
tension within the ruling coalition. In Greece, one party pulled
out of the government last week, leaving Prime Minister Antonis
Samaras with a wafer-thin majority in parliament.
Europe's unresolved structural issues could also become a
cause of concern for investors.
Policymakers failed to take a step closer to a banking union
at the weekend - a move seen as crucial to breaking the negative
loop between struggling banks and indebted sovereigns - as
Germany resisted attempts by France to water down rules designed
to spare taxpayers in future banking crises.
"There's a good chance of a Bunds recovery," Wuthe said.
Italian 10-year yields were 12 bps higher on
the day at 4.70 percent, while equivalent Spanish yields
rose 8 bps to 4.96 percent. The two countries'
yields have risen by nearly a percentage point since early May.